Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM. I'm here today with Martin Schroeter, IBM's Senior Vice President and Chief Financial Officer. I'd like to welcome you to our third quarter earnings presentation. The prepared remarks will be available within a couple of hours and a replay of the webcast will be posted by this time tomorrow. I'll remind you that certain comments made in this presentation may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the Company's filings with the SEC. Copies are available from the SEC, from the IBM website, or from us in Investor Relations. Our presentation also includes certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules. You'll find reconciliation charts at the end of the presentation and in the form 8-K submitted to the SEC today. So with that, I'll turn the call over to Martin Schroeter.

Thanks, Patricia. In the third quarter, we generated $19.2 billion in revenues, $3.7 billion in pre-tax income and $3.29 of operating earnings per share. As we think back to the discussion 90 days ago, it was around Brexit and its impact on Europe, global spending and sectors like banking and the attractiveness of investment in the emerging markets, all of these topics have the capacity to drive some volatility and results, but what you see in our third quarter results is stability in our revenue with continued strong growth and strategic imperatives and a top and bottom line consistent with what we expected. Our revenue was essentially flat relative to last year. Looking at the revenue dynamics, I want to point out a few things. Our clients are focussed on becoming digital businesses and have strong growth in cloud, security, mobile, and across our analytics portfolio reflects this. In total, we continue to deliver double-digit revenue growth in our strategic imperatives led by our cloud business. Cloud delivered as-a-service is part of a solid recurring revenue base across software and services, and our annuity revenue continued to grow. Of course, the acquisitions we made in the last 12 months contributed to growth about the same amount as last quarter and for the first time in quite a while currency was a modest tailwind to revenue growth. I’ll talk to our revenue at constant currency going forward. Looking at revenue from a segment perspective, we had very good performance in both cognitive solutions and technology services and cloud platforms. Cognitive solutions were up 5% and within that solution software was up 8%. Technology services and cloud platforms revenue also grew with continued strength in our infrastructure services and growth in integration software as we help our clients build hybrid cloud capabilities.…

Thank you, Martin. Before we begin the Q&A, I'd like to mention a couple of items. First, we have supplemental charts at the end of the slide deck that provide additional information on the quarter. And second, I'd ask you to reframe from multi-part question. So let's please open it up for questions.

Thank you. We will begin the question-and-answer session. [Operator Instructions]. And our first question is from Toni Sacconaghi with Bernstein. You may proceed with your question.

Yes. Thank you. Martin, I have hopefully straightforward clarification and then a question please. Just on the clarification the year-over-year IP gains were about $340 million or $0.30. And I appreciate that your licensing real software IP to get that, but how do we think about this has been sort of more one off rather than ongoing IP and should we be thinking of IP income increasing on an ongoing basis? And similar, if you could just clarify the tax rate, I had 14:2 [ph] as your tax rate. You talked about two points being helped from a discrete tax item. Was there something else that was impacting the tax rate that appear to get it down to at least by my model something that's closer to 14%. So if you could clarify those two that would help. And then the question is around free cash flow and how to think about it. This year you're going to be at the very high end into your range, probably free cash being a 100% or more than a 100% of GAAP net income. As we look forward next year given your guidance, is typically lower than that. Should we not be thinking about free cash flow declining in an absolute -- on an absolute basis in 2017?

Okay. Well, I think I got them all, Toni. So, we'll do the clarifications first and we won't count that as a multi-part question, we'll count that as a multi-part clarification, and then we'll talk about free cash flow. So couple of things on IP and this is actually a really important point I think Toni, our IP income, our IP income has been flat to down over the last say three, four, five years and we've been thinking about how do we continue to drive IP income? If you look back, and I'm sure you have all the data as well. If you back 15 years ago, we had as much as a $1.07 billion of IP income, now a lot of that was driven from the fact that we developed really good semiconductor manufacturers and really good semiconductor manufacturer processing technology and our ability to license that technology drove a lot of income. We have been thinking about how do we reinvigorate if you will the IP income business and part of it is what you'll see now as we're realizing some of these. So, the clarification that you asked about, is it about 340 million year to year? Yes, that's right. That's about 340 million year to year. But more importantly, we are going to continue to drive IP income. Now, we got a good third quarter on a year to-date basis where about 1.01 billion, so we're kind of flat. I don't think that we have enough to set a new annual record when we look back at the $1.7 billion that we printed 15 years ago or so, but it is certainly a focus, and keep in mind I think that these are relationships, they are long term relationships, right. So, they are not all…

Thanks, Toni. Can we go to the next question please?

And our next question is from Katy Huberty with Morgan Stanley. Your line is now open.

Thanks. Good afternoon. You didn't close any major acquisitions this quarter and yet cognitive growth margin sell 400 basis points year on year, 200 basis points sequentially. Should we not expect to see improving margins as-a-service revenue scale on the fixed cost base of data centers? And then Martin just connected to that you mentioned that the one variance to your plan for the year is that the software business, margins are tracking the plan, can you maybe touch on why that it is? Thank you.

Sure. So, I'll address actually the second one first, Katy, so when we talked about first half to second half and we laid out where saw the business in the second half, one of those elements we had on that chart last quarter was the idea of software mix and as-a-service -- software mix and as-a-service margins and it would go – it would turn into a modest positive. And I would say that's more neutral now. So not a dramatic change and it really has to do with the mix of business, you know, we're getting the kind of growth rates we would expect. You saw third quarter we had software up 3, which is an acceleration from the prior quarter, but it really is that we're also seeing good momentum in our cloud platforms business, so it’s really a mix statement that is driving that as oppose to something happening within our software margins. On the cognitive margin component the phenomena you described is absolutely accurate. As we slowdown those investments we'll see the as-a-service margin scale, we're starting to see the as-a-service business scale, but we still see so much opportunity we're going to keep driving the investments. And so we haven't gone to that point yet where the scale overtakes the investment levels in that as-a-service business.

Thanks, Katy. Can we go to the next question please?

Thank you. Our next question is from Tien-tsin Huang with JPMorgan. Your line is now open.

Great, thanks. Good afternoon. Just on the transactional sales down 5% in the third quarter, curious if there's any the line of sight here into this fourth quarter and what you might expect there in relationship to – in relation to which is on the third quarter maybe this is a question. Do we start to think about transactional sales and for the IP income, maybe together, I don't know if there is any correlation between the two in any way? Thanks.

Thanks, Tien-tsin, so a couple of things. The transactional business as we noted in the third, down five was an improvement from where we were in the second. So, we had reasonable transaction closing rates. Now, the thing to keep in mind as we go into the fourth, it is a much bigger transactional quarter for us and so while we have, what I would call a good opportunity pipeline, we have got now 85 days or a 75 days to see how the environment holds up and that will obviously drive the fourth quarter and drive the full year. When we look at – when I look at the revenue streams in the fourth, our annuity business which again smaller pieces in the fourth. Our annuity business has been growing pretty consistently quarter, to quarter, to quarter and I would expect that growth to continue into the fourth that transactional business which is again much larger tends to get a pretty good quarter to quarter sequential bump if you will about $1.5 billion. And based on our opportunity pull, we'd say that looks about like what we'll get done in the fourth as well, but there is some uncertainty in environment and here in the U.S. we've got an election to get through, but right now I'd say that my line of sight into 4Q says, that quarter to quarter impact in third to fourth is about $2.5 billion as we had – just for that transactional business.

Thanks Tien-tsin. Sam, can we can take the next question, please.

Thank you. Our next question is from Steve Milunovich with UBS. Your line is open.

Thank you. You talked quite bit about Watson. You've been running many Watson ads. I just wonder if you can give any updates from the Analyst Day on Watson. How much revenue are you generating? The revenue you do generate is it in the software or consulting buckets kind of relatively speaking that you expect going forward? You mentioned I think four, five ways, you're looking to monetize Watson at that meeting, I guess which ones are working. And you talked about it as a platform as well and I'm wondered if you consider running Watson on someone else's platform like on AWS?

Okay. Steve, I'll start with the last question first and last answer to that question is no, Watson runs on our cloud and our technology and Watson will run on the IBM cloud. With regard to the progress we're seeing, we've talked a bit about and you've seen many of our announcement around where Watson is showing up and the kind of work it’s doing, all of that as you know gets reported within our strategic imperatives and all of it goes into the cognitive solutions space that's where our Watson Health business is, that's where our IoT business is, and that’s where the Watson platform is. So, I'd say that with the cognitive solutions business we talked about it in total at plus five, the sub-segment of that where the Watson content shows up which we also provide is up eight, so good growth in that software solutions space. But keep in mind that we're also building new markets here and it's going to take some time for us to take the technologies and the processes that we bought for instant in our Watson Health business and now layer on the Watson technologies to get the ramp in growth that we expect to get out of some of them. So, yes, good progress, yes, it’s a long term investment, and all within that cognitive solutions segment and no, it's not going to run on anything but the IBM cloud.

Thanks, Steve. Can we go to the next question please?

Our next question is from Lou Miscioscia with CLSA. Your line is open.

Lou, we can't hear you. You are on mute.

Hello.

Well, there you are. Now we can hear you.

Okay. I hope it’s coming through okay. So on the software area which was up 3%, maybe can you go in there and just share with us what is organic, and would you say that we've actually gotten passed with flexible pricing situation that you've been obviously dealing with from negative growth standpoint for a couple of quarters or actually maybe about two years now?

So, a couple of things, Lou on organic, as you said software up 3 and acceleration for where this -- there is across IBM, the acquisition impact was about the same as it was last quarter, about 2 points across all of the businesses. Now lot of those businesses are software, so obviously an impact in software in the quarter, but not dramatically different again from what we saw in the second. We have – we continue to have good annuity content performance, so our annuity business continues to grow. The phenomena that we've talked about with regard to our largest customers is still part of the discussion with every large customer, it’s a question of how do they best view the deployment of their licenses. How do they best view the use of our technologies in order to make sure they are optimizing their own workloads, they make sure they are optimizing the projects they have going on. One of the things and important thing to us is are they, to make sure that they're still using our software and are they still – are they still, for instance, paying us in [Indiscernible] and are they renewing that, and our renewal rates have stayed very high and very consistent through the third quarter as well, and so we're confident that our software business has the right appeal if you will to our clients, because they continue to use it, they continue to deploy it on any large customer basis, any large customer, the discussion could be a little bit different, but again good software performance in the quarter, some benefit from acquisitions, but I would expect that our annuity base will continue to keep growing as well.

Thanks, Lou. Sam, can we go to next question please?

Thank you. Our next question is from Wamsi Mohan with Bank of America Merrill Lynch. Your line is open.

Yes, thank you. I have a quick clarification and a question as well. So, Martin when you alluded to sort of moving into this high transactional quarter in the fourth quarter, I think you alluded to about 2.5 billion sequential improvement quarter on quarter in that business, is that the baseline that is needed to achieve the 2013 and 2015 in guidance, that's my clarification. And for my question, if you think about sort of the unique one-time benefits in 2016 you had tax which was the big driver for first quarter. I know you had associated investments and then now you look at the third quarter there are some significant IP other income and I appreciate your comments around the increasing nature and sustainability of this. And I know you're not guiding it to 2017, but conceptually these elements make it seemingly tougher to grow earnings in 2017 especially at a time when base of buybacks are moderating at sub 1 billion for the last four quarters and gross margins continue to compress, so maybe you can help us taking through at a high level maybe some puts and takes and what potentially will be positive drivers are offsetting some of these headwinds in 2017?

Sure, Wamsi, and again the multi-part clarification with the question is an interesting approach, but – so first on the revenue quarter to quarter, yes, so when we look at our third to fourth as I said, we typically get about $2.5 billion in transactional revenue in the quarter and that's sort of build in one-off, I mean, we got a different – we have a lot of different scenarios on what the year might look like, but that is certainly the predominant if you will scenario on how the fourth comes in. On the view of 2017 which I'll come back to you in moment, again, I know you – and you said it I think, you did listen to my answer on IP, but this is not a onetime thing, right again, IBM has had as much as $1.07 billion of IP in our income statement, it is one of ways we monetize all of our intellectual property, it’s only one, right, we also obviously sell a lot too, but we license their IP is part of our business model. I don't think about it is one-time. We're going to continue to drive this and hopefully grow it. We've got a reasonable pull in the fourth of clients and partners who want to license our technology, so you shouldn't think of it is one-time at all. Now, as we go into 2017, with our big transactional quarter coming up obviously and 90 days we'll talk about what we saw in the environment and what that position us for 2017, but I do think we know, we know a few things as we head into next year already today, so we know for instance we've got good momentum in our strategic imperatives and we continue to see with our…

Thanks, Wamsi. Can we please take the next question?

Thank you. Our next question is from David Grossman with Stifel. Your line is open.

Thank you. So, Martin, if we look at organic growth rate of the imperatives, it looks like that began decelerating in the fourth quarter of last year and through the second quarter of this year. And then they looks at least, if my math right, they bounce back this quarter, and you did a good job of telegraphing that last year's growth was not sustainable. That said, the number are seems to be a little bit more volatile than expected. Is there any way you can help us parse this disclosure and just help us better understand what drove the deceleration and then what drove the subsequent rebound this quarter?

Sure. I think the best thing to do, David, is to look at all of this on a trailing 12 months basis. You know, we recently started giving this on a quarterly basis. It’s a good disclosure and the sense that everyone ask for it and we try to provide the components of our strategic imperatives within each of our new segments. And I think in general people appreciated having that level of detail, but to your point, if you're looking for my advice and how best to interpret this I had interpreted on a 12 months trailing basis. Our clients aren't making big, big investment decisions like who do I trust with my data and what cloud am I going to move on to? That's a decision that is going to last much longer than say, a 90 day reporting cycle. So, in any given reporting cycle there will be volatility. My advice look at it on a trailing 12 months basis and you can see the trend.

Thanks, David. Can we go to the next question please?

Thank you. Our next question is from Keith Bachman with BMO. Your line is open.

Hi. Thank you very much. I also want to ask about cognitive solutions, you mentioned that the rollout of SAS if you will or software service is impacting the margins, yet you had still a very small part of the total, it's perhaps 100% of the current revenue base. As that ramp what that continue to place pressure on your margin structure? Or to say it different way, could you characterize that we look at 2017 would margins and cognitive solutions be at a minimum flattish. How are you thinking about that? And one clarification also just, did you mentioned what the total revenues in organic sources were or was M&A about two points I hope this quarter as well?

Yes. So in total Keith, our acquisitions contributed about two points a growth, same as second quarter.

Okay. Yes.

So, on our cognitive solutions and our margins, so first keep in mind, this is our highest margin business, it is primarily software and within that it's got very heavy high value content in the on-premise category if you will, right. And so these margins which are very high, we want to and we're moving some of this business and investing in the as-a-service, so as that moves into the margin profile, the cognitive solutions could it see a little bit of margin pressure over the long term. Yes, but it’s coming from a very, very high base. And as-a-service component that's going in, it still better margin than all of the other segments in general. So, yes, the as-a-service component of cognitive solutions may have a bit of an impact just on that segment but overall it will still help IBM and again this is a very, very high margin segment at north of 80% here so.

Thanks Keith. Can we go to the next question please?

Thank you. Our next question is from James [Indiscernible] with SPE [ph]. Your line is open.

Thank you very much. And Martin thanks for the explanation about the additional investments you're doing that impacts gross margin. Can you help us understand incrementally going forward, so not say, year-over-year but kind of incrementally going forward, the efforts you been doing kind of this year. Should we expect the same type or incrementally do you feel like you're going to have to incrementally do more investments forward or just kind of at this level? Thank you very much.

Sure, Jim. I'd say that given, yes, we'll continue to invest. Do I think the rate of growth of investment has to continue? Well, the short answer is it may, but again remember how much we got done this year in terms of making room in the overall IBM equation and the productivity we are driving in parts of our services businesses, I know that we are seeing margin expansion in some of those. So yes, we will continue to invest and infact I think that some of these markets require this level or the markets require this level of investment in order to be at the leading edge with our clients, but we do make a lot more room if you will in the overall IBM equation given everything we got done this year. And we’ll spend more time in 90 days on how all of that plays out for 2017, but again we made a lot of room for investments for ourselves for next year.

Thank you. Can we please take one last question?

Thank you. And our last question is from Amit Daryanani with RBC Capital Markets. Your line is open.

Thanks. [Indiscernible] I’ll keep to one clarification and one question up. I guess you know the question really is when I look at your free cash flow usage over the last four quarters; it’s been you know more skewed towards acquisition versus what one would have thought in the past. As you look at 2017, do you think it optimizes more i.e. buybacks to be much more than you know the $1billion run rate you guys are running at and acquisitions could be small, just help us on this on the mix as you go forward. And then just to clarify when you talk about 90% to 100% conversion of net income to free cash flow in 2017 is that of a GAAP or non-GAAP number?

Sure, sure I’ll do the clarification first Amit. So that’s our GAAP net income realization. We’ve just kept it consistent in terms of GAAP net income. It was the most straightforward for we think for everyone to understand. So the free cash flow realization data is GAAP net income. On how free cash flow, skews next year and the application of our capital, I’d say first you know you can be assured that we are going to put all of our money to work as we have. We don’t tend to -- we don’t keep capital here to the extent its excess, after we’ve invested in organically and after we’ve purchased what we think we need through acquisitions and after we’ve paid the dividend we do return capital to shareholders. Over the long term in the form of share repurchase, we over the long term as we said now pretty consistently, we think over the long term we can reduce our share count by 2% to 3% and that obviously recognizes that we will continue to be acquisitive. So, I would say that Amit what -- again we’ll talk more about what we have assumed when we get to 2017 but we will absolutely continue to invest organically, we’ll absolutely continue to be acquisitive. We’ll absolutely continue to grow the dividend and then to the extent that we have access capital to return we will return it on over the long term that number from a share repurchase would be a 2% to 3% reduction. So, let me conclude, let me conclude by reminding you that we are running a highly differentiated play here. We are building obviously cognitive capabilities well beyond what others are doing with individual AI services if you will and we are building the platforms to…

Thanks Sam. Can I turn it back to you to close up the call?

Thank you for participating on today’s call. The conference has now ended. You may disconnect at this time.